Savings Fitnes

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Savings Fitness

• A Guide to Your Money and Your Financial Future
• PPT Developed by Karissa Berndt
• USU Family Finance Student

Financial Planning for Women March 2007
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Todays Program

• Provides a general overview of saving investing
• Focus on retirement but principles apply to all
  goals
• Details are in the Savings Fitness booklet
• PPT links available at www.usu.edu/fpw

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Program Objectives

• Identify your goals
• Distinguish between savings and investing
• Develop net worth statement savings plan
• Learn to manage debt
• Understand risk-return relationship
• Begin or increase saving/investing

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How to manage financial challenges and afford a
secure retirement?

• Write your goals on a 3x5 card
• Sort the cards into two stacks
• Goals in the next 5 years or less
• Goals in 5 years or more
• Sort the cards in order of priority
• Make retirement a priority!
• Write on each card what you need to do to
  accomplish that goal

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Beginning Your Savings Fitness Plan

• Current financial resources
• Net worth the total value of what you own
  (assets) minus what you owe (liabilities)
• Assets
• Possessions, vehicles, home, bank accounts,
  investments, etc.
• Liabilities
• Remaining mortgage on your home, any loans/debts,
  etc.
• Subtract your liabilities from your assets.
• Goal a positive net worth, which grows each year
• Review your net worth annually (at tax time)

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Saving vs. Investing

• Short term goals
• lt 5 years
• No risk of loss of principal
• No or low real return after taxes inflation
• Steady but slow growth

• Long term goals
• 5 years or more
• Trade potential short term loss for long term
  gains
• Positive real return after subtracting taxes
  inflation
• Volatility

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Estimate How Much You Need to Invest for
Retirement

• Worksheets software programs can help you
  estimate how much you need to invest.
• kiplinger.com (click on Retirement)
• moneymag.com (click on Retirement)
• usnews.com (click on Retirement Calculator)
• asec.org (click on Ballpark Estimate Worksheet)
• See FPW website for PPT on Ballpark Estimate
• nasd.com (click on Investor Services, then
  Financial Calculators)
• Planning for a Secure Retirement
• http//www.ces.purdue.edu/retirement/

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How Much Retirement Income Will I Need?

• Need to replace 70 to 90 percent of
  pre-retirement income
• Lower the income, the higher the that needs to
  be replaced
• It depends on the kind of retirement you want to
  enjoy

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How Long Will I Live In Retirement?

• Average male life expectancy age 78
• Average female life expectancy age 82
• Consider your health and family history
• Expect to live longer than previous generations!
• Planning for a Secure Retirement
• http//www.ces.purdue.edu/retirement/
• Module 1b Life Expectancy Calculators

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What Savings Do I Already Have?

• Social Security retirement benefits
• A pension that provides a fixed amount of
  retirement income each month
• Nest egg ? the desired total income/year ?
  (Social Security ? any pension income)
• Nest egg examples- Retirement plan accounts at
  work, IRAs, annuities, and personal savings

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What Adjustments Must Be Made For Inflation?

• The cost of retirement will go up every year due
  to inflation
• The average annual inflation rate is 3.1
• In 1980 the inflation rate was 13.5
• In 1998 it reached a low of 1.6
• Assume a higher, rather than a lower, rate of
  inflation
• Its safer to plan on 4 than 3.1

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One Simple TrickSpend Less Money Than You Earn!

• Start with a spending plan or budget
• Income
• Add up monthly income wages, average tips or
  bonuses, alimony payments, etc.
• Expenses
• Add up monthly expenses mortgage or rent, car
  payments, food bills, entertainment, etc.
• Include savings as an expense!
• Subtract income from expenses
• Consult USU Family Life Center, 797-7224

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Spending Plans Cont.

• What if expenses exceed income?
• Cut Expenses (nickel dime vs. BIG expenses)
• clipping grocery coupons
• bargain hunting (thrift stores, etc.)
• changing phone or cable to a cheaper plan
• Real savings housing transportation!
• Increase Income
• work a part-time second job
• turn a hobby into income
• jointly decide that another family member will
  work

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Adopt Savings Rules

• Americans who follow rules save more
• Pay yourself first
• Put savings/investing on auto pilot
• Save your tax refund
• Save unexpected money (i.e., windfall, gifts)
• Save all change
• Save you saved on grocery gas (receipts)
• Other ideas?

Rha, Montalto, Hanna (2007). The Effect of
Self-Control Mechanisms on Household Saving
Behavior. Financial Counseling and Planning,
17(2), 3-16.
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Avoid Debt Credit Problems

• How much debt is too much debt?
• monthly debts (credit card payments, car loan
  payments, student loan payments, etc.) ?
  mortgage ? by the money you bring home each
  month.
• The result is your debt ratio.
• Keep this ratio at 10 or less
• Total mortgage and non-mortgage debt should be no
  more than 36 of your take-home pay.

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Whats the Difference Between Good Debt and
Bad Debt?

• Good debt - provides a financial pay off
• buying or remodeling a home (within reason!)
• investing in education
• advancing your own career skills
• Bad debt - borrowing for things that do not
  provide financial benefits, or that dont last as
  long as the loan
• Depreciating assets vehicles
• vacations, clothing, furniture, dining out

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Handle Credit Cards Wisely

• Use only 1 or 2 cards, not the usual eight or
  nine
• Dont charge big-ticket items.
• Save or find less expensive loan alternatives
• Shop for the best interest rates, annual fees,
  service fees, and grace periods
• Pay off the card each month,
• If you cannot pay in full, pay more than minimum
• Still have problems? Leave the cards at home
• USU FLC 797-7224

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How to Climb Out of Debt

• Work with your creditors directly to try and work
  out payment arrangements
• Request lower APR on credit card
• USU Family Life Center Housing Financial
  Counseling
• can help you set up a plan to work with your
  creditors and reduce your debts
• PowerPay Debt Analysis https//powerpay.org/

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Investing for Retirement

• Once youve reduced unnecessary debt and created
  a spending plan, youre ready to begin investing
  for retirement.
• Participate in your employers retirement plan
• Invest in an Individual Retirement Account

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Where to Save/Invest?

• Cash Equivalents - very little risk very low
  return
• Savings accounts
• Money market mutual funds
• Certificates of deposit
• U.S. Treasury bills
• Suitable for short term goals only
• Your money wont grow
• Taxes inflation negate any growth!

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Bonds

• Corporate or Government Bonds
• You loan money to a U.S. company or a government
  body in return for its promise to pay back what
  you loaned with interest
• Small of your long term investments
• Conservative
• Low growth potential

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Stocks

• You own a part of a U.S. or international company
• High potential for growth in the long run
• Short term volatility
• Must be willing to accept the ups downs along
  the road to inflation-beating growth

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Mutual Funds

• Pools your money with money of other investors
  and invests it.
• A stock mutual fund, for example, invests in
  stocks on behalf of funds shareholders.
• Easier to invest and to diversify.
• Ideal for your Individual Retirement Account
  (IRA)
• See FPW PowerPoints on website

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Where to Put Your Money

• For goals that are at least 5 years in the
  future
• stocks
• bonds
• real estate
• foreign investments
• mutual funds
• Not insured by the federal government - there is
  the risk that you could lose some of your money
• The longer you have until retirement, the more
  risk you can afford.

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Why Take Risk At All?

• The greater the risk, the greater the potential
  return
• a diversified portfolio of stocks bonds will
  earn significantly more than a savings account.
• No/low risk no growth
• Historic Average Annual Returns
• U.S. Treasury Bills 3.8
• Government Bonds 5.3
• Large-Company Stocks 11.2
• Inflation averages 3.1
• Taxes reduce investment returns

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Reducing Investment Risk

• Diversification
• Distributing your money among several
  investments, rather than investing in individual
  companies.
• You can do this by investing in
• mutual funds
• index mutual funds
• Diversification will greatly decrease your risk
  of losing money.

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Why Diversify?

• At any given time one investment might do better
  than another.
• The factors that can cause one investment to do
  poorly may actually cause another to do well.
• By diversifying into different types of assets,
  you are more likely to reduce risk, and actually
  improve return, than by putting all of your money
  into one investment.
• Dont put all your eggs in one basket!

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Reducing Investment Risk Cont.

• Asset Allocation - investing among different
  categories of investments (FPW PPT)
• Put some money in cash, some in bonds, some in
  stocks, and some in other investments
• The choices you make about what to have in
  these major categories defines your investment
  strategy.

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Employer-Based Retirement Plans

• Does your employer provide a retirement plan?
• If sograb it! Employer-based plans are the most
  effective way to invest for your future.
• Youll enjoy tax benefits.
• Two types of employer-based plans
• defined benefit
• defined contribution

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Defined Benefit Plans

• Pay a lump sum upon retirement or a guaranteed
  monthly benefit.
• The payout is typically based on a set formula
• such as ( of years you have worked for the
  employer) ? (a percentage of your highest
  earnings)
• Usually the employer funds the plan--commonly
  called a pension plan.
• Most are insured by the federal government.

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Defined Contribution Plans

• 401(k) plans are the most common type
• Does not guarantee a specified amount for
  retirement
• The money you have available to help fund your
  retirement depends on
• how long you participate in the plan
• how much you invest
• how well the investments perform
• More common than traditional pension plans.

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Vesting Rules

• Money that you put in a retirement plan and
  earnings on those contributions, always belongs
  to you.
• Employees dont always have immediate access to
  the money their employer invests in their fund.
• Once you are vested you own all of your
  employers contribution.
• Some plans vest in stages, others after fixed
  period of employment.
• Know your employers vesting rules.
• Dont leave before you are vested!

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What If You Cant Join An Employer-Based Plan?

• If possible, take a job with a plan
• Encourage your employer to offer a plan
• Invest in an IRA (see FPW PPTs)
• Build your personal savings
• Consider an annuity (April 11 FPW)

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What If You Are Self-Employed?

• SEP (Simplified employee pension plan)
• SIMPLE IRA
• IRA
• Annuities

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Coping With Financial Crisis

• Establish an Emergency Fund
• This can lessen the need to dip into retirement
  savings for a financial emergency
• Insure Yourself
• Having adequate insurance will protect your
  financial assets
• Insurance coverage
• Health
• Disability
• Homeowners or Renters (PPT on FPW website)
• Automobile
• Umbrella liability
• Life (if someone else depends on your income)

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Monitor Your Progress

• Financial planning is not a one-time process, so
  make sure to do the following
• Periodically review your spending plan
• Monitor the performance of your investments
• make adjustments as necessary
• Contribute more toward retirement as you earn
  more
• Update your insurance to reflect changes in
  income or personal circumstances
• Keep your finances in order

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April 11 FPW

• Making Your Money Last for a Lifetime Why You
  Need to Know About Annuities
• Check FPW web http//www.usu.edu/fpw/ for related
  PowerPoint presentations
• Asset allocation
• IRA picks 2005 Mutual Funds 2006
• What is an IRA?
• Ballpark Etimate
• Taking the mystery out of retirement planning

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Questions?